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Dodd-Frank—One Year Later

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With the recent one-year anniversary of the Dodd-Frank Act on July 21, members of Congress as well as industry officials have been reflecting on the law’s effects—for good or ill.

The co-author of the landmark legislation, Rep. Barney Frank, D-Mass., ranking member on the House Financial Services Committee, remarked during a press conference in early July that he believes the Wall Street reform bill that he co-authored with former Connecticut Sen. Christopher Dodd is “holding up pretty well,” with “very few calls for substantial amendments” to be made to it.

Frank’s optimism is unmatched by Congressional Republicans. One of those is Sen. Richard Shelby, R-Ala., ranking member on the Senate Banking Committee. Shelby said during a July 12 hearing to examine how Dodd-Frank has enhanced investor protection that, “We can see more clearly the consequences of [Dodd-Frank's] special interest agenda.” Shelby maintained that Dodd-Frank “has not helped investors;” rather it “has saddled Main Street and providers of capital—the engines of economic growth—with a long list of new regulatory requirements.” At a time when the unemployment rate is at 9.2%, Shelby said, “this hardly seems like a wise course.”

Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, characterized Dodd-Frank as “a story of the ‘good, the bad and the ugly.’” Bachus said recently that while a “few” of Dodd-Frank’s provisions represent “useful reforms” to a financial system that came close to collapse in the fall of 2008, the “bad and the ugly” parts of Dodd-Frank “far outweigh those.” What’s more, he said, “their impact on our economy will be staggering.” The two primary factors that drive the nation’s economy, Bachus said, “capital and work force, will both be harmed by Dodd-Frank.”

Among the law’s 2,300 pages are 400 regulatory mandates that will be imposed on the private sector, Bachus continued. “Both financial and nonfinancial businesses will be forced to shift capital from hiring, investments in new equipment and other productive uses to comply with these new rules. Likewise, these businesses will have to redirect their workers’ time and energy to compliance rather than productive work.”

While the supporters of Dodd-Frank “sold it as tough ‘Wall Street reform,’” Bachus said, “the greatest regulatory burden will be borne by those far from Wall Street.”

Missed Deadlines and Frustration
An analysis of Dodd-Frank’s progress performed by the law firm Davis Polk Wardwell in Washington found that as of July 1, the regulatory agencies have finalized 38 rules, proposed 121 and missed 26 deadlines.

Frank argued during his comments that the real “strength” of the Dodd-Frank Act is that it “sets forth some very important principles, but gives the regulators the ability to apply them in practice.”

Frank commented several times on his frustration with the lack of funding given to the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) by his Republican counterparts. The GOP, Frank argued, is “using the deficit crisis to underfund the SEC and the CFTC.” Republicans “want to turn the SEC into a profit center,” Frank continued. “The SEC will bring in more money through its regulatory system than it will be given to run it.”

This lack of funding is creating a “catch-22,” Frank said. First, “deny the SEC and CFTC adequate funding; they, in turn, are not able to deal with the rulemaking requirements they have, and because they haven’t been able to move as quickly on the rules, [Republicans] will announce that the rules must be abolished.” This attack on these agencies’ funding, Frank continued, is coming from “ideologues” in the Republican Party.

Barbara Roper, director of investor protection for the Consumer Federation of America (CFA), told the Senate Banking Committee during her July 12 testimony that while Dodd-Frank creates a “broad” framework to improve investor protections, “investors will only reap the benefits if the SEC uses its new tools and new authority effectively and if Congress provides it with the resources necessary to enable it to do so.”

To date, she said, the SEC’s funding status is “far from clear.” While noting that the Senate secured a “welcome” funding increase for the agency in 2011, she said the House has been reluctant to provide 2012 funding for the agency that is commensurate with its broadly expanded authority. This lack of funding not only puts at risk the high-profile Dodd-Frank provisions related to derivatives, hedge funds, securitization and credit ratings, Roper argued, but, if the agency “is forced to rob Peter to pay Paul, the lower-profile investor protection issues would also suffer.”

Frank also criticized House Republicans’ efforts to undermine progress on developing rules to regulate derivatives, noting legislation passed by Republicans to postpone any new derivatives regulation until October 2012.

Risk Retention and the CFPB
There is also an “attack” on risk retention, Frank said, which he characterized as the single most important piece of the legislation. “We now have no unregulated mortgage lenders. Risk retention is a market-based incentive—there needs to be a down payment requirement.” He went on to say that there were “loans made without adequate assessment of risk,” and these bad loans “ricocheted all over the world.”

Dodd-Frank also created what he said was a “very important innovation,” the Consumer Financial Protection Bureau (CFPB), which still lacks a director. Frank argued that there doesn’t need to be a Senate confirmation to appoint a CFPB director; rather, he said, “a recess appointment will do it.” The good news, he argued, is that “we don’t have a lot of bad mortgages being made now because people are still shell shocked.” A good director of the CFPB, he continued, will ensure that far fewer bad mortgages will be issued, i.e., mortgages with a very low chance of repayment. “And consumers,” he said, “will find they are treated much more fairly.”

On the international front, Frank said that he believes “things are moving well.” America, he said, “is in the lead for pushing for an international set of standards that are better.” As the financial crisis was unfolding in 2008, Frank said it was likened to another Great Depression. He warned, however, that “I think it could have been worse than that…because now everything is interconnected.”